Has Power-One Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Power-One (NASDAQ: PWER) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

• Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
• Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
• Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
• Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
• Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
• Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Power-One.

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Power-One last year, the company dropped a point for the second year in a row. After some big swings, the stock has given shareholders essentially flat performance over the past year.

Power-One is a solar company, but it's not in the same business as better-known solar panel manufacturers. Instead, Power-One produces inverters, which collect the direct-current electricity from panels and other alternative energy production methods and convert it to AC power for household use.

Still, just being affiliated with solar has hurt Power-One. With even industry giant First Solar (FSLR -1.46%) having posted losses this year, Power-One stands out for still eking out a profit. Despite facing competition from Enphase and Satcon as well as American Superconductor's (AMSC -3.73%) attempts to break into the inverter market, Power-One hasn't had much trouble fighting off upstarts.

In fact, even with the solar industry in shambles, Power-One has shown some signs of improvement lately. Market share has been on the rise, helping the company remain the No. 2 seller of inverters in the global market, and the company has a huge amount of cash on its balance sheet.

Looking forward, just as First Solar and SunPower (SPWR -1.02%) have started to push out weaker competition from Chinese players Trina Solar (NYSE: TSL) and ReneSola, Power-One needs to start pushing out the weaker competitors in order to give itself stronger pricing power. If it can achieve that goal, then Power-One has the capacity to start moving back up toward perfection once the solar industry finally hits bottom and reaches a new equilibrium.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

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